Cohen’s Dream of Soros Status Dies as SAC Pleads Guilty

By Saijel Kishan and Katherine Burton -
Nov 5, 2013

In the hedge fund record books, there will always be doubts about how Steven A. Cohen outperformed rivals for more than 20 years.

Cohen, the billionaire founder of SAC Capital Advisors LP, is arguably the best stock trader of all time, a renowned “tape reader” with an uncanny ability to predict where prices are headed. The Stamford, Connecticut-based firm’s investment returns for clients averaged 25 percent over the past two decades, and Cohen never posted a losing year in the portfolio he personally oversees.

Yesterday, SAC agreed to plead guilty to securities and wire fraud, pay $1.8 billion in fines and forfeitures, and stop managing money for outside investors. The firm had denied wrongdoing since being indicted in July. Like Barry Bonds, the professional baseball player whose home-run records have been tainted by allegations of illegal steroid use, Cohen won’t be able to escape this question: did he excel by cheating?

SAC “focused on hiring the best talent, talent who was equipped with extensive networks to circumvent traditional lines of communication,” April Brooks, FBI special agent in charge of the New York office’s criminal division, said at a press conference yesterday. “Talent who would be prepared to get confidential information to fuel their illicit trades.”

Grand Ambition

For Cohen -- whose fortune is valued at $9 billion, according to the Bloomberg Billionaires Index -- the reputational damage is a greater punishment than the penalties he will pay, according to friends and people who have worked with him. He is, more than most big-name hedge-fund managers, obsessed with winning, whether at golf or at building an investment empire.

Cohen’s goal has always been to be acknowledged as something greater than a masterful trader, say the friends and colleagues, who asked not to be identified to avoid hurting their relationship with him. Rather, he wants to be included in the pantheon of world-class money managers such as Warren Buffett and George Soros, whose savvy investing history and prescient market calls draw a following on Wall Street, these people say.

Now he’ll be infamous for his firm’s record fine for insider trading.

Probe Continues

SAC’s penalty includes $616 million that it agreed to pay in March to settle a related civil lawsuit by the U.S. Securities and Exchange Commission. Under the plea agreement, the firm will close its hedge funds to outside investors. The government’s investigation of insider trading at SAC continues, Manhattan U.S. Attorney Preet Bharara said yesterday at a news conference. The plea deal with the firm doesn’t provide immunity to any individual.

Cohen, 57, who wasn’t charged in the indictment, has said he has acted appropriately.

SAC said yesterday in a statement that it takes “responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. These wrongdoers do not represent the 3,000 honest men and women who have worked at the firm during the past 21 years. Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred.”

Cohen was the ultimate prize for the government, the target they had pursued for years in an investigation that mushroomed into the largest insider-trading probe in history. At least 87 people have been charged by prosecutors since August 2009, of which 75 have been convicted.

Beauty Queen

The cast of characters ranges from a former beauty queen to an ex-Goldman Sachs Group Inc. board member, from a former top executive at International Business Machines Corp. to lawyers and a medical doctor. The probe has resulted in prison sentences, a suicide and a fugitive on the run in India. At least four multibillion-dollar hedge funds closed. SAC, which managed $16.5 billion at its peak in 2007, is the biggest of the firms to be caught up in the government probe.

Cohen, who once described insider-trading laws as “very vague,” still faces an administrative action filed by the SEC for his alleged failure to supervise the hedge fund’s activities. And while a judge has signed off SAC’s March settlement with the agency, the agreement is pending approval of a separate case unrelated to SAC.

While speculation has long circulated that Cohen’s returns could only be the result of access to illegal inside information, the government didn’t start focusing on SAC in earnest until 2006 while it was investigating Raj Rajaratnam, who ran Galleon Group, a New York-based hedge fund. Even as B.J. Kang, the lead FBI agent on the case, pursued the Sri Lankan native, now serving 11 years in prison for insider trading, he continually questioned witnesses about wrongdoing at SAC, Bloomberg Markets reported in 2010.

Martoma Indictment

Throughout the government probe, SAC’s name kept surfacing. At least 11 current and former SAC employees have been linked to insider trading while at the firm, including six who have pleaded guilty. Last November, a former SAC money manager, Mathew Martoma, was charged in what prosecutors called the biggest insider-trading scheme in history.

Martoma allegedly used illegal tips from doctors about an Alzheimer’s drug trial to help SAC make profits or avoid losses totaling $276 million by trading shares in Elan Corp. and Wyeth LLC. He’s scheduled to go on trial in January.

Smart, Lazy

Cohen has never been part of the hedge-fund social clique, even with his 14-acre estate in Greenwich, Connecticut, and extensive art collection that includes works by Pablo Picasso and Andy Warhol. He rarely appears at charity or social events where the rich congregate. Friends and co-workers describe him as shy, preferring to spend his time with family and a handful of friends.

The third of eight children, Cohen grew up in a middle-class family in Great Neck, a village on New York’s Long Island. His father was a dress manufacturer and his mother a piano teacher.

Competing with seven siblings wasn’t easy for Cohen, even though he got good grades in high school and was a star soccer player. His mother said he’d have done better in a family with two kids, according to a 2010 article in New York magazine. Cohen told the Wall Street Journal in 2006 that his mother thought him lazy and smart, and considered his younger brother, an accountant, the financial whiz of the family.

Self-Taught

During his days at University of Pennsylvania’s Wharton School, Cohen eschewed team sports and pursued poker, a pastime he had developed in high school. He socialized with a handful of guys who also grew up on Long Island. He also became fascinated with trading, and would often skip class to go to a local Philadelphia brokerage. There he taught himself to be a tape reader, predicting the direction of a stock by watching each tick of the price and the volume of shares traded.

Unlike some of his counterparts in the hedge-fund industry who embarked on their careers at well-known Wall Street firms, Cohen started out at Gruntal & Co., a small brokerage firm in New York. It was in front of the trading screens where Cohen proved his worth.

Cohen has an absolute desire to win, former colleagues who worked with him during the 1990s said, in part stemming from a deep fear of failure. That fear helped him when he left Gruntal to start SAC in 1992. In the course of 10 years, he produced annual returns ranging from 17 percent to 73 percent and he drove his colleagues to compete against each other. He imposed his fierce competitive streak into the fabric of his firm. In the early years, everyone on the trading floor could see everyone else’s profits and losses, said people who worked with him at the time.

Comfortable Shoes

In spite of his strivings to be the best, Cohen isn’t mesmerized by the trappings of his success, friends and former colleagues say. The decision in 1998 to buy his Greenwich mansion was his wife’s, not his. Most of the time, Cohen dresses casually, preferring to wear half-zip sweaters and comfortable shoes rather than designer suits.

While Cohen acknowledges that he’s a great trader, he has told people that he doesn’t consider that a big accomplishment. Instead, he has said he wanted to be respected as one of the greatest money managers of his generation, and build a hedge-fund organization to match.

Soros, Robertson

At the turn of the century, even as securities laws got tougher and more competition came into the hedge-fund industry, Cohen started dreaming of joining the ranks of the biggest firms. At that time, hedge funds primarily served wealthy people, and just two firms, Julian Robertson’s Tiger Management LLC and Soros Fund Management LLC, had surpassed $20 billion in assets, though both lost money and clients soon after they achieved those heights as the Internet bubble burst.

Soros around that time was fighting his own insider trading allegations, though they barely dented his reputation. French courts in 2002 convicted him for using inside information about Societe Generale SA and ordered him to repay 2.2 million euros ($2.96 million) he had made from the trade. The fine was later reduced to about 940,000 euros. French stock market regulators didn’t pursue Soros, saying insider-trading laws were too vague to determine whether he’d broken them. Soros said he didn’t engage in improper trading.

Cohen continued to build SAC, though his efforts to expand beyond stock trading into bonds and other strategies like private equity weren’t always profitable. After the firm lost 19 percent in 2008, he returned to pure stock investing.

Trichet Blunder

In 2010, Cohen decided he would personally get involved in macro trading -- the strategy of betting on currencies, commodities and interest rates that made George Soros his fortune. He added a roughly $700 million in macro investments to his own account, which at the time had about about $3.5 billion, including borrowed money.

“I always understood macro but now I’m heavily involved in those markets,” Cohen said in May 2011 at a hedge-fund conference in Las Vegas sponsored by SkyBridge Capital LLC.

While Soros is a renaissance man interested in philosophy, economics, politics and philanthropy, Cohen has few passions and interests outside of trading, people who know him say, a trait that on occasion has caused him embarrassment.

At a January 2011 dinner held during the World Economic Forum’s annual conference in Davos, Switzerland, Cohen found himself seated next to then-European Central Bank President Jean-Claude Trichet. As Cohen, who is also known for his self-deprecating sense of humor, tells the story, he talked with Trichet all through dinner, referring to him repeatedly as Francois. He didn’t realize his error until dessert was served, when he spied Trichet’s name tag.

Art Collector

While Cohen is one of the most important collectors of modern art in the U.S., his friends say that it’s part of his drive to generate a profit rather than a love of art itself. It also serves as an icebreaker and topic of conversation for the shy Cohen, they say. While the late Roy Neuberger, founder of Neuberger Berman, bought thousands of pieces of art and never sold a single one, Cohen regularly trades his collection. He’s seeking to sell about $85 million worth of art at Sotheby’s later this month.

One area where people who know him say he’s shown a great passion is the plight of veterans coming back from war. Cohen co-chairs a veterans committee at New York-poverty-fighting charity Robin Hood Foundation. Robert, his son from his first marriage, enlisted in the Marines and was sent to Afghanistan. Cohen, speaking at a Robin Hood event in May 2012, told the audience that his son was doing fine, though “many of his former comrades are not.”

Charity Work

Last year, Cohen and his wife gave a $17 million grant to New York University’s Langone Medical Center for the Steven and Alexandra Cohen Veterans Center for the Study of Post-Traumatic Stress and Traumatic Brain Injury.

While Cohen was trading art, building out his business and giving away money, SAC’s troubles with the government began to get worse after the October 2009 arrest of Galleon’s Rajaratnam. Insider-trading charges filed against former SAC employee Richard Choo Beng Lee thrust SAC into the probe-related headlines. Lee pleaded guilty to crimes committed after leaving SAC and agreed to cooperate with the government to avoid prosecution.

Names of other former SAC employees and their firms soon after surfaced amid a growing web of defendants rounded up by prosecutors who used wiretaps and informants to build their case.

Clients Flee

FBI raids on hedge-fund firms and a slew of arrests followed, including that of former SAC money manager Donald Longueuil, who tried to destroy evidence of his crimes by taking pliers to his computer drives and then venturing out in the middle of the night to dump them in garbage trucks around Manhattan.

There was little respite for Cohen; he was also accused by his ex-wife of insider trading in a lawsuit about their divorce, while a Brooklyn rabbi tried to extort millions of dollars from SAC by threatening to disclose insider trading at the firm. In September, a federal judge granted a request by lawyers for Patricia Cohen to amend the suit for a third time, while the rabbi was convicted of extortion and blackmail in November 2010.

Scrutiny on SAC culminated in November when FBI agents arrested Martoma in an insider-trading case that put Cohen directly in the government’s crosshairs. The charges caused SAC’s clients including Citigroup Inc.’s private bank to rush for the exits, pulling billions of dollars. Executives at SAC, which had $15 billion of assets at the beginning of the year, expect the firm to start 2014 with $9 billion, most of that Cohen’s.

While yesterday’s settlement crushes Cohen’s dreams of joining the ranks of Buffett and Soros, he will still be worth around $7.2 billion after paying his fine. More important, he will still be able to do what he’s loved since his college days -- trading.